Internal corporate governance mechanisms and firm performance: 3SLS empirical evidence from Thailand

This paper aims to examine the effect of corporate governance (CG) on firm performance (FP). The 3SLS (Three-Stage Least Squares) regressions were performed on a system of equations based on a panel dataset of 1,768 firm-years of Thai-listed companies from 2014 to 2020. This is to assess the simultaneous linear/curvilinear relationships between CG and FP. We found that internal CG mechanisms (i.e., the board size, institutional ownership, and dividend policy) are significantly related to firm performance measured by return on equity (ROE), return on assets (ROA), and price-to-book ratio/Tobin’s Q (PBR). Board size exhibits a curvilinear relationship rather than a linear relationship with FP. This reflects the integration between resource dependency theory and stewardship theory. Relative to ROE and ROA, a board size of 10 is optimal (which is associated with a peak ROE of 14.8% and a peak ROA of 3.4%. A board size greater than ten would see a fall in ROE and ROA. Relative to PBR, a board size of 12 is optimal, with a peak PBR of 2.39 times. This study further identifies a ranking of effective CG mechanisms.